Hub Group, Inc.'s (NASDAQ:HUBG) price-to-earnings (or "P/E") ratio of 19.8x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
Hub Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
Check out our latest analysis for Hub Group
How Is Hub Group's Growth Trending?
Hub Group's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 35%. This means it has also seen a slide in earnings over the longer-term as EPS is down 34% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 21% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 11% per year, which is noticeably less attractive.
With this information, we can see why Hub Group is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Hub Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Hub Group that you need to be mindful of.
If these risks are making you reconsider your opinion on Hub Group, explore our interactive list of high quality stocks to get an idea of what else is out there.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.